Usage-based Insurance the Latest Interesting Time

Jamie Bisker | May 27, 2014

The old, reportedly Chinese curse about living in interesting times recently came to mind, and that it might not be much of a curse anymore. It is fair to say there are no typical, or more to the point, uninteresting times if there ever were such epochs. Recorded history seems to be one set of interesting times connected to subsequent, if not even more interesting times.

Each period had its progenitors in terms of back stories, and in a rapidly increasing fashion, each had its set of technologies that hastened change. I thought of these points as I have been working on publishing a follow up piece to our usage-based insurance (UBI) report from September of last year.

The majority of the insurance crowd seems to have moved forward over the past 18 months with the idea that automotive UBI has a useful place in their product catalogue. UBI was clearly one of the most innovative (or interesting) things to happen in the industry for some time. As is basically normal for innovation in our industry, it took about 10 years for most insurers to feel that they could reasonably engage in such a model.

Keep in mind this timing did not reflect what was (or even is) possible, it’s just how long the onus of resistance was upon the industry. That resistance was really caution and has now turned to practical matters of implementation, marketing, and offering discounts for safer driving among the insurers that are offering some form of this pricing/discount model.

It is ironic, however, that what may have started out as a more personalized approach to insuring drivers has now turned into a way to ‘encourage’ driving behaviors that meet certain expectations in exchange for discounts on premiums and other benefits. Certain, mass-market, or established expectations I might add. While it might be cynical to point this out, it does seem that the industry is working to maintain existing rating categories and that probably makes sense.

This activity also recalls the role that micro-segmentation played in recent years to refine the previous mass-market approaches to the sales and marketing of auto insurance. The technique allowed for the identification of swaths of underwriting and marketing opportunities for which pricing was already established but seemingly under used.

Progressive’s 1991 initial pilot that used credit histories to better price and underwrite policies was the beginning of modern, data-based segmentation refinement . Those consumers that had higher credit scores did turn out in statistical analysis to be better risks and Progressive began marketing to them. And if I recall correctly, this concept had portions of its origins in the business that company developed around high-risk drivers of different types. Understand what differentiates a risk, isolate and rate it, and then sell the heck out of it. And this happened before Peppers and Rogers 1994 book, The One to One Future that heralded the future of one-to-one marketing approaches.

It may be even more ironic that, due to the delay in its implementation, UBI it may not have as large or as long-lived a role to play in the automobile insurance business due to the next rapidly evolving technological advance-autonomous vehicles. The original plan for ‘smart’ highways as the major mechanism for more automated driving became the victim of both political inertia and technological change. These factors, coupled with the rise of telematics, smart devices, and cognitive computing in general all are pushing the advent of self-driving vehicles forward.

CNET’s Seth Rosenblatt reported recently (http://www.cnet.com/news/googles-self-driving-car-turns-out-to-be-a-very-smart-ride/, May 14, 2014) that “The tech titan's robo-cars have logged more than 700,000 hours since it began working on the vehicles in 2009. Google expects to have them ready for public use between 2017 and 2020.” It will take at least that long for the rules, regulations, and laws about indemnity, fault/no-fault, subrogation and many other insurance aspects to be sorted out.

In the meantime, many not-dumb (clever?) vehicles equipped with an increasing amount of assisted-driving functions will be part of our daily commute and will begin to reduce accidents, claims, and payouts while even more reductions should be realized when autonomous cars are more prevalent.

These encroaching realities will also be part of insuring the less portable assets and aspects of our lives. The intersection of risk simulation, the Internet-of-Things (IoT), and social media with cognitive computing will support the introduction of personal risk management (PRM), one of the next things to impact the industry.

In the meantime, carriers will work to make more consumers and policyholders aware of UBI’s potential for saving them money and improving driving behaviors (especially in targeted populations such as new drivers and older folks). We can look with some optimism to a future where we really do pay for the risk we represent and not just a convenient statistical bucket. This may well be the best part of the interesting times that we live in today in spite of ourselves and our behaviors.

ELECTRONIC CHAT

The Email Chat is a regular feature of the ITA Pro magazine and website. We send a series of questions to an insurance IT leader in search of thought-provoking responses on important issues facing the insurance industry.

Bill Sinn

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